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TMK Notes Get Negative Rating

TMK AIZ

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Torchmark Corp.’s (TMK - Analyst Report) newly issued $300 million worth of 3.58% Senior Notes, which will mature in 2022, have been assigned a 'BBB+' rating whereas the junior subordinated debentures have been given a  'BBB-' by Fitch Ratings.

The rating agency has affirmed 'A-' as long-term ratings and Insurer Financial Strength (“IFS”) ratings of 'A+' to the parent and its insurance subsidiaries. The rating outlook has, however, been revised to Negative from Stable.

Torchmark will use $200 million from the proceeds to fund the proposed acquisition of Family Heritage Life Insurance Company. The company announced this acquisition last month and expects to close it by the fourth quarter of 2012.
 
The company had originally planned to fund the purchase from internal resources, but later decided to use it for financing debt it. This will increase the leverage ratio to 29.0%, which in Fitch’s view is higher than the average levels.
 
The remaining funds from the Senior Notes offering will be utilized for meeting the working capital requirements, which include discharging of the $94.1 million in principal amount outstanding of the company’s 7.375% Notes that mature on August 1, 2013. On the other hand, the proceeds from the Junior Subordinated Notes will be used to redeem all of the $120 million of 7.10% Trust Originated Preferred Securities, maturing in 2046.
 
The ratings affirmation by Fitch takes into account the company’s operating fundamentals, which are in line with the current ratings. The revision of ratings outlook to negative, however, reflects the ratings agencies’ concern over company’s increased financial leverage. On the flipside, Fitch stated that the financial leverage will come down to more moderate levels since the company’s subsidiaries generate cash and remit it to the aren’t for discharge of debt.      
 
Torchmark also compares favorably on the basis of pre-tax operating return on assets as well as interest coverage. The company also has adequate capital to support the current IFS rating of ‘A+.’ Fitch estimates TMK's total adjusted capital and NAIC Risk Based Capital (“RBC”) to be $1.4 billion and 331%, respectively (at June 30, 2012). Though the capital will somewhat deteriorate post the issuance of notes, this step will not cause a ratings downgrade. 
 
The rating agency can, however, consider downgrading the ratings if in case investment losses go beyond its expectations; risk based capital falls below 290%, the company cannot  bring back its leverage position to more normal historical levels and interest coverage ratio falls below 5x.  
 
Standard & Poor's has assigned senior unsecured debt rating of 'A' to senior unsecured notes due in 2022, and 'BBB+' to junior subordinated debt due in 2052. Also Moody’s Corp. (MCO) has rated Torchmark’s senior debt with ‘Baa1’ and junior subordinated debt with ‘Baa2’.
 
Torchmark competes with Assurant Inc. (AIZ - Analyst Report) and currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on its shares.

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